At Hewlett-Packard's (HPQ) Page Mill Road complex in Palo Alto, Calif., in the basement beneath the meticulously preserved offices of founders William Hewlett and David Packard, is a cavernous room that has the feel of a chaotic startup. Tables and chairs are strewn about and a giant, makeshift screen takes up an entire wall, even wrapping around a corner. HP projectors made for corporate presentations are clustered together to cast huge video-game images on the wall. The life-size scenes are so crisp and detailed that you almost feel as if you could walk onto a Madden NFL game or Halo 3 battle.
This game room is the kind of place where you would expect to find young programmers hanging out, jazzed on Mountain Dew and revving up ideas for a new 3-D Web or the next generation of social media. It's a different business culture from the one you'll find in the gray cubicles, where most engineers work, in the rest of the building. The area's playful environment is critical to HP's future. The space—and its projection system, itself a prototype—is one result of the Innovation Program Office, launched in 2006 to help the info tech giant buy hip, nimble startups for its huge Personal Systems Group, which makes PCs, mobile devices, and workstations. The hope is to inject big doses of the small companies' creative juices directly into the HP culture. (See also a playbook on learning from startup cultures.)
HP has learned some key lessons on the acquisition trail over the past two years: how to develop cool, high-margin products that appeal to new consumer groups such as video-game fanatics; how to use social media to conduct Web-based consumer research; and, perhaps most important, how to inspire engineers in HP Laboratories to turn concepts into products faster.
HP's culture has been in turmoil in recent years. The HP Way, the company's management code, was once Silicon Valley's innovation model. Top executives mingled with lower-level employees to discover fresh ideas. For decades the company's engineer-led approach generated a flow of popular, affordable, and utilitarian products until it became synonymous with complacency and high costs. Carleton S. "Carly" Fiorina came in as chief executive in 1999 and tried to blow apart that culture. Her marketing-focused strategy generated strong sales but demoralized employees. Mark V. Hurd, who succeeded her in 2005, has been working to restore tradition and reinvigorate the company's 30,000 engineers.
Trouble is, restoring the HP Way may no longer be enough. The old strategy was for engineers to create technologies and products and then expect customers to buy them. Yet over the past five years the company's businesses—computers, printers and imaging machines, storage devices and servers, and info tech service—as well as those of Dell (DELL), Cisco (CSCO), and Yahoo! (YHOO)—have shifted their focus from developing cool technologies to making products customers want. "We were missing the DNA of an organization that had its finger on customer desires," says Phil McKinney, a chief technology officer of the Personal Systems Group and head of the innovation office.
HP is trying to market personal computers today as being friendly, not just fast and powerful. Its slogan: "The computer is personal again." It's not just selling fast printers, but pitching terrific printing experiences. But shifting away from a tech focus to a consumer orientation is proving hard for a 156,000-person company that includes a small army of engineers convinced they are right.
Enter Voodoo PC. The gaming room at HP was the brainchild of Voodoo's Rahul Sood, co-founder of the 30-person startup based in Calgary, Canada, a cult brand among gamers. Now 35, Sood is chief technology officer of HP's new global gaming business unit.
The tech giant snapped up Voodoo because it's a fan-based, gamer-driven company with a devoted following for its luxe offerings, from lipstick-red PCs to customized $50,000 PCs tricked out with jewels and leather. The machines have cut-out panels that reveal their complex innards—the typical Voodoo units are about as far as possible from the commoditized, no- nonsense gray boxes that HP sells. Sood himself is a fierce gamer, and he began the outfit with his brother to make better machines for himself and his friends. Gamers, not techies, run the business. At Voodoo, "we took the ultimate wish list from customers and rolled it into the product line," says Sood, who has gelled, spiky hair and rectangular hipster glasses. He's now helping to bring that customer-centric DNA to the 600 engineers and researchers who inhabit the huge company's research labs.
"When I first walked into HP Labs, I thought, 'Everyone is smarter than me. They know more about the tech and fundamentals of research.' But I brought a completely different perspective. They don't know what gamers want or need.…No one [at HP] had ever figured this out."
So how is Voodoo, the innovation unit's initial project, changing its new parent? The first fruit of the acquisition, the HP Blackbird 002 personal computer, was available for preorders online in September and hit stores this month. The PC was originally designed by an outside shop, but HP scrapped that plan and redesigned the machine with Voodoo after the deal. It has distinctively Voodoo—and un-HP—touches such as a customizable black metal panel with elegant geometric designs and a liquid cooling system that replaces the distracting hum of fans. It's so user-friendly that consumers who want to customize it themselves can do so without using tools. It takes 10 seconds to replace or upgrade a hard drive on Blackbird—a job that typically requires 30 minutes. Although it's a premium PC (priced at $2,500 to $5,000) aimed primarily at hard-core gamers, the high-margin machine was purchased by film editors, animators, medical imaging specialists, an energy trader, a plastic surgeon, and even Navy SEALs, according to the company. It's a powerful, fast computer with room for five hard drives to accommodate rich graphics.
Curious HP engineers, frustrated at not being able to translate their ideas into products quickly, have been making pilgrimages to the gaming room. Chat up researchers at HP Labs, and the tension between engineers and the suits is clear. "There's an overabundance of ideas in our labs, but there's a gap between labs and product development," says Patrick Goddi, a senior researcher. Before the innovation office was created, he says, "It was hard to get a sense of oomph."
Goddi and various other researchers who are avid gamers visit the room in their spare time. After hearing about the speed (just three months) in which Sood pushed the projector system from a mere idea toward a prototype shown at trade shows, Goddi says he felt a rush of energy. With new confidence, he pursued a potential product aimed at gamers based on his current project, a video-messaging service called Conversa, a cross between YouTube (GOOG) and e-mail. "Rahul fired us up to build something, and to bring fun to work," he says. Goddi was inspired, he says, to develop Conversa as a social-networking tool for online games.
Startups are even providing HP with a new customer-based system that accelerates product development in other divisions. Snapfish (HPQ), an online photo-sharing service acquired by HP in 2005 with more than 42 million members now, inspired an experiment called Snapfish Labs that begins this month. Targeted members of Snapfish vote on proposals coming out of HP Labs and provide instant feedback. One upcoming idea: a service that allows people at conferences to upload, manipulate, and archive photos of meeting materials, including the writing on whiteboards, and share it with people not attending.
(The jury is still out—the votes haven't been tallied yet.) Snapfish Labs has boosted the rate of customer-focused innovation because consumers can weigh in early on potential HP products. "We're bringing raw projects to the market more quickly," says Patrick Scaglia, who oversees the strategy of the corporation's Imaging & Printing Group. "Before, this was a challenge," he says. "We had a long investment cycle. We'd go with one idea a year. Sometimes it would take 10 years to get a good idea [to market]."
The process itself of buying startups is teaching HP some hard lessons. Take Tabblo, acquired in 2007. It's an online printing service that allows members of social media sites to format content such as pictures so they look better when printed. Users can, for example, create their own slick postcards. In October, Tabblo and HP announced a partnership with Flickr, the popular photo-sharing and social-networking site acquired by Yahoo. But in putting the deal together, cultures clashed. The HP suits "expected that everything we were going to do was going to be defined by business development, legal, and finance executives. They'd expected to talk about the [partnership] contract for a few months," says Tabblo founder Antonio Rodriguez. "But we were used to time scales of days, not weeks or months." Tabblo surprised the suits by signing the contract and releasing the Flickr service in only six weeks—vs. an expected three to four months—thanks to a casual relationship between Flickr and Tabblo execs that didn't involve lengthy bureaucratic talks. It was a wake-up call for HP. "What has been dramatic in the last year since we acquired Tabblo is that we suddenly have injected inside HP a Web culture we never had before," says Scaglia.
OLD SCHOOL RESISTANCE?
Throughout Silicon Valley, acquisitions-as-usual are changing, too. In the past, big established companies usually bought agile startups mostly for new technologies and products. One popular model has been to buy companies and keep them independent to maintain their creativity much like Google (GOOG) and YouTube or News Corp. (NWS) and MySpace (NWS). Or Dell and Alienware, Voodoo's rival in the hard-core gamer PC market.
When large corporations do try to change the ways they encourage creativity, they don't typically go out and buy new companies. Sure, Xerox (XRX), Boeing (BA), and IBM (IBM) sometimes create "skunkworks" teams to help speed cutting-edge technologies. But these groups usually work on projects independent of corporate reporting policies and structures. Other companies build venture-capital units, like Intel Capital (INTC), which vet and fund the development of internal as well as external projects. But these incubated businesses remain isolated from the larger corporation.
What HP, Yahoo, Cisco, (CSCO) and others are doing now is different. Their new strategy is innovation via absorption—and that's very hard to do. "It's difficult to infuse the acquirer's culture with the target's culture," says Saikat Chaudhuri, a Wharton School assistant professor of management who's followed the tactic for a decade. Even HP's McKinney admits: "Companies have to realize this isn't a quick fix. It isn't business process re-engineering. This is a fundamental shift in the culture of an organization."
HP has embraced many kinds of innovation in recent years. The acquisition of Compaq, for example, changed the nature of its business. Hurd's move to raise efficiency and cut costs changed its many processes. Now, it's inciting a cultural change. And the company that began as the prototypical story of two guys experimenting in a garage is trying to see the world through the fresh eyes of a startup. Again.